Appetite for hedge funds rises as investors ramp up the risk

Hedge funds are well and truly back in vogue, according to a new report by global bank Citi, which has outlined some of the fastest growing investment products in the entire asset management industry.

A new survey from the bank published Thursday was conducted at a client event of institutional investors with the respondents representing $935 billion of assets under management. The survey said these investors were adding to their allocation of hedge funds and opting for "risk premia" and "smart beta" products. Risk premia is an investment style that aims to create a premium for the amount of risk involved and smart beta looks at benefiting from market inefficiencies in a transparent way.

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According to the survey, 81 percent of respondents are currently investing in, or looking to invest in, risk premia and smart beta solutions. Citi also projects assets under management in smart beta and risk premia hedge funds will rise from $265 billion in 2014 to $1.2 trillion by the end of 2019.

"Hedge funds represent a third of profits generated by the asset management industry and these findings confirm the importance of the sector to institutional investors," Daniel Caplan, EMEA head of investor services sales at Citi, said in a press release Thursday.

Citi said the main driver for these types of investment were "volatility mitigation" followed by "return optimization." It added that as interest in risk premia solutions continued to rise, it expected hedge funds to play an increasingly important role in providing diversification through risk-aligned strategies.

Hedge funds are a type of investment fund that operate with different regulatory constraints than other funds, such as mutual funds, pension funds and banks. They are occasionally criticized due to some funds taking a different approach to investing. According to data provider Eurekahedge, hedge funds outperformed underlying markets in April. By the end of the month, hedge funds were up 1.12 percent, whereas underlying markets (represented by the MSCI World Index) rose just 0.67 percent. Year-to-date, hedge funds are up 0.62 percent.

Emerging market hedge fund managers performed notably well in April, rising 4.17 percent on the back of resilient oil and commodity prices, according to Eurekahedge.